Hold Sun Pharma says Edelweiss

Sun Pharma acquires controlling stake in Taro
Sun Pharma (SUNP) has acquired controlling stake in Taro, with the tendering of
Taro promoters shares in SUNP’s open offer for Taro shares. Post tendering of
Taro promoter stake, SUNP now controls 48.7% stake in Taro, ex warrants, and
voting rights of 65.8%. We estimate SUNP to have paid ~USD 37 mn for this
stake, with a total acquisition value of USD 143mn.
􀂄 Our view
We view this transaction as positive and a final closure on the long saga of Taro
acquisition by SUNP. Taro’s product portfolio of dermatology, topical and OTC
products is complementary to SUNP’s generic portfolio in the US and SUNP plans
to leverage Taro’s current manufacturing and R&D in Canada and Israel for new
delivery systems. Taro’s proprietary (branded) portfolio (including two NDAs)
also provides a potential revenue stream for SUNP, with further upsides from
NCE candidate T2000 (for essential tremor).
As per IFRS, we understand that SUNP would likely consolidate Taro to its
accounts, despite holding only less than 50% stake in the company. Moreover,
we are unclear on whether SUNP would exercise its option for 3.8 mn warrants
at USD 6 per share, which would increase its stake to 53%.
As highlighted earlier, Taro’s accounts for last two years are provisional and
carry risk of restatement. However, on a provisional basis, annualizing H1CY10
Taro results, we estimate upsides of 4% and 7% to EPS in FY11 (six months)
and FY12 respectively. We believe that there could be upsides to estimates,
given possible potential for Taro margins to increase under SUNP management.
􀂄 Outlook and valuations: Positive; maintain ‘HOLD’
We maintain our “HOLD” rating on the stock, continuing to value core business
earnings at 20x FY12E EPS (ex Taro) and assigning INR 20 per share to “one-off”
non recurring sales. We would likely revisit our valuations for Taro (earlier INR
76 per share, valuing Taro at 1X CY09 sales for 100% stake) post more clarity
on business outlook and potential accounting restatements in Taro, but highlight
that we believe that Taro acquisition is a complementary acquisition with positive
EPS impact on SUNP and has the potential for new revenue streams and
operational efficiencies.